While every business has different needs for physical space, one of the most important considerations for every business involves whether to pay monthly rent or opt for a purchase of a commercial building. There may be no easy answers, but there are specific factors that will allow you to make the right decision, based on your company's financial situation and goals.
Weigh the Options
Startup firms typically look for rental space, whether their needs are for a simple Minnesota office, a warehouse or a storefront. Leasing space preserves cash and allows optimum budget control while you grow your business beyond working from your living room.
But your first step is to undertake a systematic cash flow analysis. Not only should projected cash flow be an essential element of your business plan, but it should be an ongoing process during the life of your business. Changing realities will dictate your decisions, and influence your success.
The three elements of a cash flow analysis are:
- Your Operating Costs: Every business has a fixed figure just to "keep the doors open." Look carefully not only at your sales or income figures, but also at projected costs and net profit.
- Investment Activities: Hard costs of equipment are assets on the balance sheet, but they represent cash outflow that affects the funds you have to spend in other ways.
- Financing Costs: If you secured a loan to begin the business, or if you have investors who must be repaid, your long-term cash needs must reflect those costs.
Whether you start a business on a shoestring, have sufficient reserves to allow you a financial "comfort zone" or a secure line of credit to draw upon, base your business decisions on current facts and intelligent projects. Never give in to wishful thinking and emotion.
Reasons to Lease
One of the best reasons to lease may be that the money paid out is treated as a business expense. Sign a long-term lease and you know exactly how much your monthly commitment is for the term of the lease. It simplifies financial planning. Know that there are different types of leases as well, and know the specific terms before obligating your business for an extended period.
In addition, by paying someone else, you:
- Require less cash at the outset;
- Have certain tax advantages;
- Establish a credit history;
- Eliminate maintenance or repair costs for physical facilities;
- Can plan for future growth or a move to more suitable space when the lease term expires;
- May allow you to take advantage of bargain prices if the location is not a priority.
Depending on your business, you might always wish to lease space as a long-term solution. Whether you employ other people to produce widgets, operate an urban farm and market produce to restaurants and grocery stores, or maintain a staff to develop ideas and sell intangibles, there is no reason why you cannot rent office or warehouse space while at the same time buying land or a building to house part of your operation.
In fact, one way to "invest" in your business might be to consider buying a building so you can sublease space to other businesses.
Know When to Buy
Conventional wisdom is that a business should lease space until it can "afford" to own. However, in some scenarios the ability to change locations (possibly to Ramsey?) or change directions can be an advantage.
- Usually require a substantial initial cash outlay;
- Obligate your business over the long term;
- Give you a location guarantee;
- Offer long-term financial savings, in addition to annual accounting and tax advantages;
- Build equity in real estate that appreciates over time;
- Require ongoing maintenance and upkeep, as well as code compliance and property tax payments.
- Allow you greater control.
The Final Decision
Depending on the nature of your business, owning can give you the opportunity to enlarge a building, reconfigure interior space, subdivide and lease a portion of the facility or establish an entire new use for an older building.
If you decide the time is right to consider becoming an owner, you have options. But before you leap, look to your business plan and consider what your needs will be in two years, or five or ten. Plan for growth if that is your plan. Or view your building as another part of your business that could become a separate asset if you outgrow the space.
Choose your options carefully. Consult with your accountant and legal representative early and often, whether you plan to lease or buy, and be open to the changing needs of your business as well as to economic signals.
Your choices boil down to maximizing opportunity. Ultimately, whether you rent or own the physical space in which you conduct your business, it's your dedication, your control of costs and your attention to detail that will determine your business success.